Estate Planning 101
This guide provides a brief overview of a will and trust and what each can accomplish.
WillA will is the traditional document that would determine who and under what circumstances beneficiaries are to receive assets of a decedent. The typical simple will would provide that if a husband died the assets would go to his wife if his wife was living and if his wife was not living, the assets would go to their children. If, however, any of the children are minors (under the age of 18) there would be a requirement to establish a contingent trust. A contingent trust is a provision in the will that would essentially recite, if any of the children or one of the children is under the age of 18 (or some other age that you can select), the property would be held in trust by a person you select for the benefit of that child. When that child obtains the age that you have selected, the money would be distributed to them. In the meantime any money in the trust would be used for the education, housing, clothing, food, etc. The will also would name a guardian for the minor children. The guardian is the person with whom the child resides while he is a minor. The will would name an executor. The executor is the person who administers the will through probate and distributes the money to the trustee or the beneficiaries.
Probate is a judicial process by which an executor is given the judicial authority to act on behalf of the estate to sell assets, to collect debts, pay bills, etc. so that the net funds available in the estate can be distributed to the beneficiaries. This process takes at least eight months and will cost the estate a minimum of $2,000 depending on the complexity of the estate. Contrary to popular belief, a will does not eliminate probate.
To summarize, a will would require the naming of an executor who would administer the estate through probate. It would require the naming of guardian who would be the person with whom the minor children would reside and would require the naming of a trustee. A trustee is an individual who would manage the funds on behalf of the children until they attain the age the decedent has chosen for distribution. The same person can act in all three capacities.
TrustsA trust is an agreement between an individual acting as a trustee and a donor, the person who creates the trust, wherein the donor deposits money or any other assets with the trustee. The trustee is to manage those assets for the benefit of a beneficiary. All trusts have three persons: the donor, the person who created the trust; the trustee, the person who manages the trust; and the beneficiary, the person for whom the trust is established. In the traditional formal trust arrangements with financial institutions and trust companies, the financial institution acts as the trustee so the donor enters into an agreement with the financial institution called the trust agreement establishing the terms of disbursement, the terms of distribution, etc. and transfers funds into the trustee's control. The trustee then manages the funds for the benefit of the beneficiary in accordance with the terms of the trust agreement.
A popular form of trust is a living trust. A living trust is simply a written property agreement wherein the grantor transfers property to a trustee for the benefit of named beneficiaries. In the case of a typical revocable living trust -- the grantor, initial trustee and initial primary beneficiary is the same person -- you. This is commonly referred to as a "self declaration of trust". In some situations, the property may be transferred to someone else as trustee, which may be known as a "trust agreement". In either case, the trust is a "living" trust because it is created and becomes effective immediately during your lifetime (as opposed to a testamentary trust created under a Will upon death).
Sometimes touted as an estate tax-saving device, living trusts, in themselves, produce no inherent estate tax savings. The same estate tax savings that can be achieved through a living trust can be obtained through a testamentary trust (a trust contained within a will that becomes effective only upon your death). However, the living trust has a number of features that a Will (with or without a testamentary trust) cannot duplicate, including:
1. Probate Avoidance. A properly funded living trust will avoid the additional cost, complexity, delay and burden of probate proceedings after your death. Avoiding probate is especially useful if you own real estate in more than one state because a separate probate estate must generally be opened in each and every state where a decedent owned real estate (known as "ancillary" probate).
2. Avoiding Guardianships and Incapacity Planning. If you should become disabled or incapacitated, successor trusteeship in your living trust can be quickly and privately triggered. This allows the successor trustee that you have designated to take over and manage your assets for your benefit, without requiring your family to go to court to have you declared disabled.
3. Privacy. Unlike wills, which are filed with the county courthouse after death and become public record in perpetuity, a trust is a private document that is not filed anywhere and cannot easily be discovered by disgruntled non-beneficiaries or other overly curious individuals.
4. Asset Protection for Beneficiaries.